Thiel’s Clarium Hedge Fund to Make Tech Investments After Losses

Max Levchin, co-founder of PayPal Inc. and chief executive officer of Slide Inc., left, and Peter Thiel, head of Clarium Capital Management LLC and founding investor in PayPal Inc. and Facebook Inc., right, speak to attendees after an event at the Commonwealth Club in San Francisco. Photographer: David Paul Morris/Bloomberg

Aug. 15 (Bloomberg) -- Peter Thiel, whose Clarium Capital
Management LLC lost 90 percent of assets from its peak until the
end of last year, plans to invest the global macro hedge fund in
what made him a billionaire: private technology ventures.

Clarium may invest a “significantly higher percentage” of
assets in private equity in the near term, the San Francisco-based firm said in a July regulatory filing. The investments
will include tech companies, James O’Neill, a managing director,
said in an interview.

Thiel, who became a billionaire with investments in PayPal
Inc., Facebook Inc., game maker Zynga Inc. and LinkedIn Corp.,
is steering his hedge fund to technology companies after
Clarium’s assets shrunk some 90 percent from more than $7
billion in mid-2008, thanks in part to losing bets on oil
prices, currencies and stocks. Demand for social-networking
stocks has pushed the implied value of privately owned Facebook
beyond $82 billion, leading some investors to caution that a new
tech bubble is underway.

“There is a strong appetite for these Internet and
emerging technology companies,” Aaron Kessler, an analyst at
ThinkEquity LLC in San Francisco, said in a telephone interview.
“Only a couple winners can do well for you, as Peter has seen
in the past.”

Clarium LP, the firm’s main hedge fund, takes contrarian
positions based on major economic trends influenced by
government policies, economic cycles, new technology and
commodity fluctuations, according to the company’s July
registration with the U.S. Securities and Exchange Commission.
Clarium, like other macro funds, traditionally has made its
macroeconomic bets by trading futures, foreign-currency
contracts, bonds and stocks.

‘Attractive’ Opportunity

Now the firm views private equity as an “attractive
investment opportunity,” according to the filing.

“It was important to give our investors advance notice
that we were going to potentially branch out into a new asset
class,” said O’Neill, adding that Thiel wouldn’t be available
for an interview. “Peter has a long and successful track record
as a technology investor.”

While many investors equate private equity with leveraged
buyouts of public companies by firms such as KKR & Co. and
Blackstone Group LP, the term has another meaning in connection
with tech businesses that have yet to hold initial public
offerings. For them, private-equity deals are tantamount to
late-stage venture capital, with a single investment firm often
committing $30 million or more, all in cash.

Late-stage deals accounted for 24 percent of venture
capital financing rounds in the 18 months through June, compared
with 10 percent in the same period ended 10 years earlier,
according to the National Venture Capital Association in
Arlington, Virginia.

‘Filling in Gaps’

“Venture funds and private-equity funds are filling in
gaps where companies used to raise money from the public
markets,” said Harry Weller, a general partner in the Chevy
Chase, Maryland, office of New Enterprise Associates, the first
venture firm to back Groupon Inc., the Chicago-based provider of
online coupons. “The small tech IPO no longer exists.”

Private equity has also attracted Steve Case, co-founder of
AOL Inc., and Ted Leonsis, the owner of the National Hockey
League’s Washington Capitals, who teamed up in June to open
Revolution Growth Management Company II LP, a Washington firm
raising $400 million to invest in 10 to 12 “technology-enabled
businesses,” according to SEC filings last month.

Private-equity investments tend to produce lower returns
than seed and early-stage venture deals, while the risks are
also reduced because companies are less likely to fail,
according to Emily Mendell, a spokeswoman for the venture-capital association.

Doubles and Triples

“You may not have the home-run returns, but you will get a
double or triple,” Mendell said.

LinkedIn, based in Mountain View, California, and ranked as
the largest professional networking website, soared after its
initial public offering in May, with shares reaching $122.70 on
their first trading day from an offering price of $45. The
market value of Palo Alto, California-based Facebook surged
above $82 billion as of Aug. 5 from $12.7 billion at the end of
2009, according to SharesPost Inc., a trading market for closely
held companies.

Valuations are being driven in part by small investors
based on the success of the Facebook website, which has more
than 750 million users, and Apple Inc.’s iPad computer tablet,
said Bill Glynn, chief executive officer of ISB Ventures LLC, a
Dallas-based private-equity firm. Current valuations are
unsustainable, he said, adding that some of these companies will
share the same fate as Internet stocks that cratered when the
1990s tech bubble burst in 2000.

Former High-Fliers

“Remember when AOL and Yahoo were high-fliers?” said
Glynn, referring to AOL Inc., the New York based Web-services
company, and Yahoo! Inc., the Sunnyvale, California, owner of
the most visited U.S. Web portal. “They are nothing now.”

Thiel, 43, a graduate of Stanford Law School who previously
traded derivatives for a Credit Suisse Group AG unit and
practiced securities law at the New York firm Sullivan &
Cromwell LLP, has a history of making both macro and technology
bets. In pursuing private-equity deals, he would be adding to
his earlier role as a seed investor by also focusing on more-established companies.

Thiel Capital International LLC, a hedge fund he set up in
1996 to trade futures on equity indexes, debt and foreign
exchange, made the sole seed investment in December 1998 in
FieldLink Inc., the predecessor to PayPal, according to a 2006
lawsuit filed by Amit Choudhury, a former business associate.

Price ‘Distortions’

Thiel later became chief executive officer and invested his
own cash in PayPal, acquiring a stake that was valued at more
than $100 million after the online-payment company’s IPO in
February 2002, the court documents say. That July, EBay Inc.
agreed to pay $1.54 billion to acquire PayPal.

When the deal was completed that October, Thiel started
Clarium Capital Management to carry out a macro strategy based
in part on exploiting “asset price distortions,” the July SEC
filing said. Meanwhile, he reinvested some of his personal
wealth in technology startups such as Facebook, where he became
the first outside investor by purchasing a $500,000 stake in
2004.

Thiel’s personal tech bets have prospered, lifting his net
worth to $1.5 billion as of March, as estimated by Forbes, which
ranked him No. 833 among the world’s billionaires. Meanwhile,
Clarium has struggled since a plunge in crude prices in the
second half of 2008 left the fund down 4.5 percent for the year,
according to SEC documents and investor letters.

Losses, Redemptions

By the end of 2010, Clarium had fallen 65 percent from its
mid-2008 peak, even as annualized returns since inception
equaled 12 percent, according to an investor letter. Losses and
redemptions had cut the firm’s assets to $462 million as of Jan.
1, according to the adviser registration.

Clarium signaled it might be making more tech investments
when it closed its New York office last June. O’Neill said at
the time the New York employees would be relocated to San
Francisco as part of an effort to be nearer to Silicon Valley to
monitor innovation.

The firm listed a second macro fund in its lineup as of
March 1. Clarium Macro Investments Ltd. held $304 million, and
Clarium LP’s assets fell to $129 million from $924 million a
year earlier, according to the July filing.

Thiel, who added about $200 million of his own money to
Clarium LP in 2009, is cited as an investor in Clarium Macro.
The fund follows the same strategy as Clarium LP and invests in
parallel with it in some instances, the filing said.

Dual Roles

In addition to running Clarium, Thiel is a managing member
and stakeholder in Founders Fund LLC, a venture pool whose
principals include Ken Howery and Luke Nosek, co-founders at
PayPal, and Sean Parker, Facebook’s founding president. “There
may be circumstances” in which Clarium and Founders Fund invest
in the same companies, according to Clarium’s filing.

Thiel’s roles with both Clarium and Founders Fund don’t
create a material conflict of interest, the company said in the
filing, “because the investment focus of the Founders Fund is
generally different” from that of the macro manager, according
to the filing. When the two firms invest in the same company,
Clarium’s conflicts committee will be responsible for
identifying and resolving any issues.